Hemisphere Media Group, Inc.
Q2 2019 Earnings Call Transcript

Published: 2 Aug 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to Hemisphere Media Group, Inc.'s Second Quarter 2019 Financial Results Conference Call. My name is Sydney, and I will be your operator today. A replay of the call will be available beginning at approximately 1 p.m. Eastern Time today, Friday, August 2, 2019, by dialing [phone] or from outside of the United States by dialing [phone]. The conference ID for the replay is 4063557.I will now turn the call over to Ms. Danielle O'Brien.

[Danielle O'Brien:]

Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Danielle O'Brien, and I'm with Edelman Financial Communications, Hemisphere's outside Investor Relations firm. Joining me on the call today is Alan Sokol, Hemisphere's Chief Executive Officer; and Craig Fischer, Hemisphere's Chief Financial Officer.Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of Hemisphere and are subject to uncertainty and changes in circumstance, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements.In addition, these statements are based on a number of assumptions that are subject to change. Please refer to our Company's most recent annual report on Form 10-K and our other public filings for a more complete discussion of forward-looking statements and the risk factors applicable to our Company. Forward-looking statements included herein are made as of the date hereof, and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.During today's call, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier this morning. Management believes that this non-GAAP information is important to investors' understanding of our business.I will now turn the call over to Alan.

[Alan Sokol:]

Thank you, Danielle, and good morning, everyone. We continue to have strong momentum into the second quarter, delivering growth across all of our key revenue streams and defined overall U.S. subscriber trends. We are proud to offer highly differentiated content to fast-growing target audiences with untapped distribution and advertising opportunities. Unlike general market broadcasted cable networks, which are losing viewers and subscribers to major streaming services offering similar content, there are no streaming substitutes for the content we provide.Our channels have the top Spanish-language movies and the best serialized dramas from throughout the world as well as the large selection of and highest quality exclusive content from Puerto Rico, Central America and Dominican Republic. For the millions of Hispanic Americans seeking this content, our channels are the exclusive destination. Moreover, because we control the rights to the vast majority of our content across all media, we have the capacity to offer our content whenever and wherever our viewers prefer.Turning to Puerto Rico. During the past few weeks, we have witnessed an unprecedented popular uprising which has captured the attention of the world. The immediate result of the protests has been the resignation of Puerto Rico's governor. We are optimistic that the clear and unequivocal message sent by the public to elected officials will result in greater transparency and accountability and a heightened focus on economic growth.While it is likely that these events will result in additional federal oversight which could potentially cause delays in federal funding, we do not expect the total amount of recovery proceeds to be affected. Independent of the political upheaval, the economic metrics in Puerto Rico remained positive. The unemployment rate remained stable in June at 8.4% and is the lowest unemployment rate in at least 55 years.Auto sales in the first half of 2019 were up 4% over the comparable period of 2018 and net migration out of Puerto Rico was less than 2,000 persons in the first quarter of 2019, a significant decrease from pre-storm levels according to the most recently released passenger data from San Juan International Airport.We are extremely proud of tireless work performed by WAPA’s world-class news organization in covering the political crisis. WAPA provided its audiences in both Puerto Rico and the U.S. with nonstop uninterrupted coverage, including as many as 13 consecutive hours of coverage in a single day.During these historic weeks, WAPA was an indispensable source for the latest news and insights garnering as much as the 90% audience share at times and unprecedented achievement and WAPA America, we simulcast all of WAPA's news programming provided more extensive coverage of the crisis than any other network in the U.S.WAPA America's unmatched coverage was on display as the protest peaked during the week of July 15, when WAPA America was the highest rated U.S. Spanish language cable network from 6

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Net revenues in the second quarter were $39.1 million, an increase of 13% as compared to net revenues of $34.8 million for the year-ago period. Net revenues for the six months ended June 30, 2019, were $74.3 million an increase of 16% as compared to $63.8 million for the year-ago period. These increases were driven by growth across all of our revenue streams.Affiliate revenue for the three and six months ended June 30, 2019, increased $2.0 million, or 10%, and $4.9 million, or 13%, respectively, over the comparable periods in 2018. These increases were due to rate increases and subscriber growth, including the launch of Pasiones on Spectrum in April and continued restoration of Pay TV subscribers in Puerto Rico.Advertising revenue for the three and six months ended June 30, 2019, increased $0.9 million, or 6%, and $4.2 million, or 17%, respectively, over the comparable periods of 2018. The increase in the three-month period was due primarily to the timing of Miss Universe Puerto Rico, which was produced in the second quarter of 2019, as compared to the third quarter of 2018.The increase in the six-month period was also due to the favorable comparison with the first quarter of 2018 which was negatively impacted by Hurricane Maria. Other revenue for the three and six months ended June 30, 2019, increased $1.4 million and $1.3 million, respectively, over the comparable periods in 2018, both periods driven by higher licensing revenue from our content and the contribution from Snap Media, which we acquired in November 2018.Operating expenses in the second quarter were $25.1 million, a decrease of 5%, as compared to $26.5 million for the year-ago period. Operating expenses for the six-month period were $49.0 million, a decrease of 3%, as compared to $50.7 million for the comparable period of 2018. These decreases were due to lower stock-based compensation and depreciation and amortization expense. Additionally, we incurred Hurricane related expenses in the prior year periods which we not occur in the current periods.Operating expenses in the six-month period were lower as a result of a $1.5 million gain in the current period related to reimbursements from the FCC for equipment purchases required as a result of the spectrum repack. This positive impact was partially offset by higher programming and production expenses relative to the prior year period when we reduced costs at WAPA following Hurricane Maria, as well as the production of Miss Universe Puerto Rico, which in 2018 was produced in the third quarter. The gain from the FCC spectrum repack is included in operating income but back out of adjusted EBITDA.Adjusted EBITDA on the second quarter was $17.5 million, an increase of 18% as compared to $14.8 million for the comparable period. Adjusted EBITDA for the six-month period was $32.4 million, an increase of 27% as compared to $25.4 million for the comparable period.Turning to the balance sheet, we had $208 million in debt and $79.5 million of cash as a June 30, 2019. Our gross leverage ratio was approximately 3.1x and net leverage ratio was approximately 1.9x. During the quarter, we repurchased approximately 10,000 shares of common stock at a weighted average price of $12.90 for an aggregate purchase price of approximately $135,000.As of quarter end, we completed our $25 million share repurchase plan, which was announced in 2017. The completed share repurchase plan does not include the additional 25 million authorized to be used for opportunistic share repurchases. Capital expenditures $1.4 million in the quarter, we continue to incur CapEx to replace equipment damaged by Hurricane Maria and equipment required by the spectrum repack. We anticipate that insurance proceeds and FCC reimbursements will cover most of these expenditures.Turning into strategic investments during the quarter, we funded $8.1 million into our joint ventures, including $6.3 million in Canal Uno, $1.6 million in Pantaya, and 200,000 in the Snap production joint venture with MarVista. We are affirming our full-year 2019 guidance of mid-team percentage growth and adjusted EBITDA with multiple avenues for growth including the unique and content and channel offerings which we provide to our fast growing audiences coupled with our strategic investments. We believe we are well positioned to create long-term shareholder value.We'll now open the call to your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Curry Baker with Guggenheim Securities. Your line is open.

[Curry Baker:]

Good morning. Thanks guys. So I guess starting with Puerto Rico, can you maybe give us some more color as to the advertising environment there and whether or not we've pretty much reached a normalized state there post-storm in the back half of the year?

[Alan Sokol:]

Hi. Curry, it’s Alan. Good morning. Yes, I think at least as far as we can see for the moment, it looks like advertising is normalized. I think advertising has been basically normalized for the past year. If we look at second quarter this year, it was fairly in line with where it's been the past two years. I think on balance, that's a good result given the instability in the market and given the out-migration following the storm. So we feel pretty good about where things are. We think that there's an opportunity that advertising will increase with the inflow of federal funds and insurance funds over time.

[Curry Baker:]

Okay. And also there, do you have any sense as to where or can you give us any sense where share is and do you continue to see a kind of sequential improvement in your share in Puerto Rico?

[Alan Sokol:]

Yes, we grew share – second quarter this year, we grew share over second quarter last year and over first quarter this year. So we feel very good about that. The new additions to our schedule, the 4

[Curry Baker:]

Okay. And then maybe shifting gear to the U.S. subscription side. Can you just tell us – I know you launched in the quarter Pasiones on Spectrum. Are there any other pockets of distribution in the U.S. that you're still looking to fill? And can you maybe also talk about the underlying subscriber trends that you guys are seeing relative to obviously the pressure on most U.S. cable networks?

[Alan Sokol:]

Yes. I think we've mentioned in the past that we still have a number of holes that we are very focused on filling, primarily television Dominicana. And then secondly with some of the vMVPDs, some of them now include Hulu, YouTube and not even launched Spanish language packages yet. So that's an opportunity for us going forward. On Sling, not all of our channels are fully carried. So that's another opportunity for us. So we view the vMVPD situation, which is where most of the growth is these days as a really good upside opportunity for us as well as the traditional carriers vis-a-vis television Dominicana.And I think with respect to our space, the Hispanic space, we continue to see positive trends and we are optimistic about those trends going forward. We did have disruption in the past three quarters because of DISH's situation of Univision. We are finally seeing that that situation has stabilized and resolved itself and we're hopeful that DISH will start reversing. I think we were encouraged by DISH's numbers that they just came out with – since we only see numbers on a two-month delay, we are not fully – we don't fully – we haven't fully seen the effect of DISH's pretty good results for the last quarter, but hopefully we'll start seeing them over the next couple months.

[Curry Baker:]

Okay. And maybe just following up on the virtual vMVPDs. Are you guys in active conversations there or is it still just a little too earlier or can you provide any additional color?

[Alan Sokol:]

Yes, we are in active conversations. Not all of them are immediately planning on launching Hispanic packages, but they all have plans to do so. And we're always in conversations with DISH and Sling about opportunities there.

[Curry Baker:]

Okay. And then maybe on Pantaya, are there any – is there any additional color you can provide at this time? Subscribers or anything like that? Or is it still too soon?

[Alan Sokol:]

Yes. We know Lionsgate have released specific subscriber data, and I apologize that because I know that's really what you need to put some value around it. But I think, what I can say is that we're very encouraged by the trends. We are ahead of our plans. We're seeing very positive subscriber response and response to that marketing and new programming and churn rates continue to decline, which of course is really positive vis-a-vis a long-term outlook. And we have some amazing product coming into Pantaya, the balance of the year, which we think will accelerate our growth even further.

[Curry Baker:]

Okay. That's helpful. And then maybe on the 10-year extension of the Concession License in Colombia, did you guys expect this or is this an incremental positive? I don't think you had mentioned that before as sort of something on the horizon.

[Alan Sokol:]

It is an incremental positive. We did not expect it. Our license, which is 10 years renewable for another 10 years, we would not expect to receive this renewal this quickly. We lobbied for it hard and we were successful in getting it and we feel great about it now having a clear 20-year path to getting a great return on our investment.

[Curry Baker:]

Okay. Got it. So basically you've got a 20-year path and it's renewable for another 20 years and like I think it's – 37 or something like that. Okay, got you.

[Alan Sokol:]

37.

[Craig Fischer:]

Yes. We're still…

[Curry Baker:]

And then I guess one more question just on the equity losses. They ticked up this quarter, whereas the past four quarters have been trending down. Was there anything unusual that went on this quarter or anything to kind of discern there and just thinking about that line going forward?

[Craig Fischer:]

It was reflected in some of the investment in programming at Canal Uno, that was made particularly Alan had talked in prior quarters about, since Cinelatino's and the universal deal that we had done there for programming. So that was just the timing of the recording of that programming.

[Curry Baker:]

Okay. Thanks. And then let's see, I think that's largely it – I guess maybe one more if you'll indulge me. Is there anything that you guys can say on the M&A front? I know it's always a tricky one, but just sort of maybe qualitatively how the pipeline's looking and whether or not, anything is maybe going to take place this year?

[Alan Sokol:]

Okay. You just sound like a broken record. And obviously, I can't get into specifics on this. But we are encouraged and optimistic about our pipeline and hopeful to get a deal done this year. I think there's a reasonable chance that we will. But again, I thought that before and set it before and it hasn't happened. So until its' done, it's not done. But we feel good about several opportunities that we're in various stages on and opportunities that we feel are fastballs down the middle for us.

[Curry Baker:]

Okay. Thanks. I think that's it for me. I appreciate it. Thanks guys.

[Alan Sokol:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Stephen Carll with Wells Fargo. Your line is open.

[Stephen Carll:]

Thanks. Maybe first I think WAPA America subs were down sequentially and they were down year-on-year. And Alan, I know you mentioned about the impact from DISH starting to fade away a little. So is there just anything we should read into what's going on at the WAPA America sub trend?

[Alan Sokol:]

No, that's just combination what's happening with various distributors that it's primarily a function of DISH and continued loss of subs on DISH, which as I said, seems to have a baited as of the end of the quarter. So we're optimistic that that going forward that will continue to improve.

[Stephen Carll:]

Great. And then just back on Puerto Rico, there's been some headlines that AT&T and DirecTV maybe looking at selling some of their assets there. So I'd be curious if you have any comment on just how you think that might affect the market. And related to that, DirecTV has been still off with some of the broadcasters here in the U.S. like CBS and Nexstar. So I was wondering if you could comment about any upcoming renewals you've gotten Puerto Rico and if you think there's any more tension around retrans rates, like maybe we're starting to see crop up here on the domestic side?

[Alan Sokol:]

I'm trying to remember all of your questions, but if I missed them, just repeat them.

[Stephen Carll:]

Yes. Sorry about that.

[Alan Sokol:]

No worries. So on DirecTV or on AT&T in Puerto Rico, we have heard about the possible sales of their wireless business. To our knowledge, they're not marketing their television business. But if they do, frankly, it's not an issue for us.As you know, we entered into a renewal with them last year, so we have some tail on that. And that renewal unfortunately required us to go dark with them for six weeks. But at the end of the day, we got what we wanted. So I think we showed both our resolve and our market leverage in the way we got that deal done.And I think we set the message to the market that to the distributors that they cannot afford to take a risk not to have WAPA on there. I mean, you look at events of the past few weeks with the protest. So we get generated as much as the 90% share of the audience. There's no way any distributor can think about having us up yet.We're not – as strong CBS is, we're CBS, NBC, Fox and ABC combined in Puerto Rico. So we feel very good about our leverage and our position down there, and our ability to continue to drive growth in our retransmission rates. Obviously, these negotiations are never easy.And there's pricing pressure, but we're confident that we can continue to drive growth even in a much more significant way than U.S. broadcasters can because of our share – mind share and our share of audience down there. Your other question was?

[Stephen Carll:]

No. You covered it all. And then just on the content you announced with MarVista, I think that's some of the first sort of true original content that you've both created and will then be distributing with Cinelatino and Pantaya. So could you maybe just expand on, if you have a multi-year plan to develop a lot more original content and maybe what that looks like in a few years time?

[Alan Sokol:]

Yes. As you may recall, a big part of our motivation for doing this snap deal was for us to get into the original production business in a bigger way and Latin American in a more institutionalized way. And we have started to do that through this joint venture with MarVista. MarVista is a great established independent production company that produces high quality programming and a really cost effective way.And they have experienced producing Latin America as well. We have formed a team down based in Mexico and we have quickly launched our first co-production. I can't disclose this studio that we've launched it with, but it's a major U.S. studio that we are co-produces with.It's a great, 10 episode premium series that we started production on. They will take Latin America, rights. We have U.S., as far as Pay TV rights and we receive a nice producer fee on it. So it's a really good model for us going forward, both financially and strategically.

[Stephen Carll:]

Great. And then just to last one for Craig. I didn't want to leave you out, Craig. Adjusted EBITDA, it's a tough comp in the fourth quarter. I know you're not going to give quarterly guidance, but should we expect adjusted EBITDA to grow in each of the quarters in the back half?

[Craig Fischer:]

Yes. Look, we're not going to get into quarterly guidance. We will guide it for the full-year and we're affirming that guidance. We've benefited earlier this year from the comparison to prior year's first quarter, which was impacted by the storm. We talked about certain timing – certain events, productions like Miss Universe in Puerto Rico.We also have the shifting from the timing of recognition of licensing of our content. So it will be vary from within quarter to quarters, puts and takes that you probably are identifying. So we're not going to comment on within the quarters. But obviously, we're expecting growth in the second half of the year.

[Stephen Carll:]

Thank you.

[Operator:]

Thank you. And our following question comes from Kutgun Maral. Your line is open.

[Kutgun Maral:]

Good morning. Thanks for taking the question. I wanted to ask again about your subscribers friends just because it is such a unique story, your cable nets, the sub growth over there is about 2.5% in the U.S., 4% in Latin America. Even backing out Pasiones getting on spectrum and TV Dominicana relaunch on Univision last year. You're still outperforming the rest of the traditional Pay TV market.So I just wanted to get your thoughts on continued growth for the balance of the year. Are there any renewals coming out that might accelerate that growth? And has the tenor of the affiliate discussions changed with those – the distributors that, you mentioned that have seen sub growth coming from dish and or have you not had those discussions just yet?

[Alan Sokol:]

Hi, Kutgun, good morning. We remain optimistic, we think our paradigm is just different and better than that of our general market peers as the – even as the ecosystem continues to contract, we continue to see the steady organic growth that is then step function. We see step function growth whenever we have a launch on one of the systems and as I mentioned earlier.We still have opportunities for new launches. But this situation through some noise into the numbers, we believe that that situation is now resolve and over and feel good about and we've had very good discussions with this or they feel very positive going forward about their Hispanic business and feel committed to that business. So that's very good.In the meantime, several other distributors have seen really significant growth and I think have looked at this situation to try to take advantage of it and use it as an opportunity to drive their Hispanic business. We're always in discussions with distributors. Our channels are staggered in terms of their expiration dates. So those renewals always offer us opportunities to potentially expand distribution, particularly with distributors that have the vMVPD services that were not fully distributed on.And again, given the strength of our channels, given the fact that they're priced in a way that I think is not offensive to the distributor. We feel like we're generally have positive partnerships with distributed with the distributors and they view us as a strong profit center for them and not as like necessarily as a cost center or loss center for them.

[Kutgun Maral:]

Okay. Great. And three just quick ones on Pantaya to the extent that you could talk about it. First as it continues to scale in subs, are you at all thinking about expanding it to be an AVOD service and then on its subs, what impact has it seen since getting added onto Roku, earlier in the year and are there any plans to be added to other platforms?And just lastly, we've seen a lot of SVOD and perhaps more broadly direct to consumer streaming services raised their prices. So the extent that you could talk about it again, what are your thoughts on maintaining the price point to continue the sub growth as opposed to perhaps flow through some of the content costs inflation that you're seeing into the retail pricing?

[Alan Sokol:]

On the AVOD we've had those discussions, that that's something we will continue to evaluate over time or there's no current plans to add an AVOD or convert to AVOD and SVOD business is looking really good and positive are the only ones out there that have a business like this. Obviously Netflix and Hulu have some Spanish language content, but their offering is very shallow and it's not really a focus of their offering.And we feel like we have a corner on the market and it's a great market and a great niche. And we've seen in the early innings so far strong proof of concept and demand for this product. So we feel great about the way we're positioned in the market and the opportunity going forward. The Roku addition has been positive for us. We definitely seen some pickup as a result of Roku and are in discussions with them about doing more marketing and doing more together to continue to grow that business. They have noticed that as well.We're also in discussions with a number of other platforms about getting launched, including, a number of additional vMVPDs that are launching SVOD platforms, SVOD services on their platform. So we feel that that's a big opportunity going forward. And then final was that pricing? Is that what your final question?

[Kutgun Maral:]

Yes.

[Alan Sokol:]

We were comfortable with the price that we're selling it now. We didn't get the good price in the mark. We've seen good receptivity. We've done some studies, honestly that showed that our prospective subscribers will be willing to pay much more for this service. So we think there's opportunity going forward to raise prices. But for now we're sticking with the 599 price and we Boston reduced a yearly plan, which has seen great take up in the initial stages.

[Kutgun Maral:]

Okay, great. Thank you so much.

[Operator:]

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Alan Sokol for closing remarks.

[Alan Sokol:]

All right. No further remarks. Everybody have a great weekend and thank you for joining this morning.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.